Ideas

Saturday, January 5, 2013

Like the rest of India, I have been following the news about
the Delhi gangrape and its aftermath. As I read these news, I am saddened,
shamed, shocked. But not surprised.

I am saddened because we lost Nirbhaya. I am sad for her family,
I am sad for her friend and co-victim, I am sad for the people who knew and
loved Nirbhaya, and I am sad along with my country men and women as a nation to
have lost a daughter. A daughter with dreams, a daughter who worked hard to fulfil
those dreams, a daughter who wanted to help her fellow citizens and a daughter
who was brave in the face of death to worry not about herself but about her
mother and family. She represented what is best in India – the love and care of
others before oneself.

I am shamed in our leaders. Rather than lead after this
event, they have followed. If there had been no protests, there would have been
no action, and no movement towards justice. I am more shamed at some of the
statements that have come out of some of our leaders after the event. These statements
reflect what a lot of Indians think and believe, and how these beliefs foster a
system where women are attacked with impunity. We have the President’s sonchastising the women protesters; as if this was some small outrage they were protesting
against. We have a Congress minister blaming the victim for travelling at
night. We have a BJP minister that blames the victim for crossing a “Lakshman
Rekha.” We still believe what Ravana did was Sita’s fault! And we have a
national leader, the head of the RSS, no less, saying that there is more rape in India than in Bharat. Let alone the untrue factual basis for these
statements. Are the values of India (so-called “western,” but really universal
values) really to blame? What are these values that he is so concerned about?
Equality of women? The freedom for women to decide how they want to lead their
lives? Their right to their bodies and their right not to be violated? We
really believe that in “Bharat” there is less rape and violence against women
than in countries with “western values!” I could understand if a lay person
unexposed to the world believed this. But the head of a national organisation
that runs many educational institutions? In the countries with these so-called “western”
values, any political leader who had made these comments blaming the victim
directly or indirectly would have had to resign. Not in India. I
am shamed.

I am shocked because we allowed this to happen. I am more
shocked at what we did not do after it happened. No passerby, in foot or car,
helped the victims as they lay bleeding and naked for almost an hour. I am
shocked at the police, who instead of helping the victims immediately argued about
jurisdiction. I am shocked that they could not take the victims to a private
hospital nearer and faster to reach, possibly because they believe
(unfortunately rather correctly) that private hospitals will also be callous and
not treat the victims without payment. I am shocked that that these policemen
are not held responsible for this delay, which if avoided may have increased
the chances of saving Nirbhaya’s life. I am shocked that policemen who are
supposed to protect the citizens actually harm them through indifference and
callousness – not recording rape FIRs, blaming and intimidating the victims and
sloppy investigations are common across India. I am shocked that nothing is
done about it.

But I am not surprised. I am not surprised because I knew
all this before it happened. And did nothing. We did nothing. We said, Chalta
Hai. This is India, here everything Chalta Hai. Stuff happens, life goes on.

But no more. We have to leave behind the land of Chalta Hai
and create a country of Nahin Chalega. We owe this to Nirbhaya, to every rape
victim in India who has suffered from our indifference and to every woman who
deserves the same protection and freedom that men have.

I am heartened at the protests that have happened and by the
people that have spoken out. This has led to rapid arrests, fast investigation
and, I hope, a quick trial and meting of justice. I also hope this leads to
broader systemic reform in our legislation, in our police, in our judicial system
and in our polity, where politicians who see women as less than men, and who
blame the victim are history. And I hope that as a nation we change out
attitudes so that this does not happen just because people fear swift justice,
but also because people know that rape is wrong.

But this will only happen if we keep protesting, speaking,
writing, voting. We cannot stop. No to Chalta Hai. Yes to Nahin Chalega.

Monday, May 11, 2009

Countries across the world from the US to Europe, Japan, China, East Asia, India, Australia and the Middle East are constantly trying to increase their economic competitiveness. Different countries have pursued different policies and strategies over time in the quest for competitive advantage in one or more sectors. These policies and strategies have included infant industry protection, trade liberalization, privatization, public sector enterprises, export subsidies, investment in education, provision of cheap finance to domestic industries, promotion of FDI, building of economic cities and special economic zones, etc. Sometimes these policies have worked to enhance economic competitiveness, at other times not. There is an abundance of literature that has tried to understand which policies and strategies work, when and why.

In this essay, I dwell on this question of what a country can do to increase its economic competitiveness. However, rather than identifying which policies work, or building an argument for sets of policies (it is all about free markets, or all about free trade or all about export promotion, or all about fixing institutions, etc.), I propose a modest yet powerful meta-level framework to think about this question and help understand which policies and strategies work in increasing economic competitiveness, when and why. Using this framework, I will argue that a pragmatic approach works better than a dogmatic one - not a very original insight, nevertheless an important one that needs to be restated and argued if we are to progress. But this is not the only insight that this framework offers as we will discover later in this essay.

I introduced this framework in a previous essay as a guide to help us think about planning for the future instead of planning for the past. I reproduce this framework below in Exhibit 1. It shows four different possible states of knowledge - the known known, the unknown known, the known unknown and the unknown unknown. In this essay, I use this four states of knowledge (4SoK) framework, to think about how a country (or a state or region, for that matter) can build economic competitiveness.

For the purposes of this essay, I assume that a country has competitive advantage in an economic sector (using sector to mean either an industry or class of economic activity within an industry or class of economic activities common to more than one industry), if it meets one of the following three conditions:

It can deliver same or higher quantity of good or service at a lower price

It can deliver better quality of good or service at the same or lower price

It is the only country with the technology to produce a unique good or service or an existing good or service of unique quality (can be one of few countries, if the demand cannot be met by one country only)

Economic competitiveness can be seen as a function of three things - knowledge, cost of factor inputs, and cost of getting products and services to international markets. This last cost includes transportation costs, communications costs, and other costs that are not determined by the exporting country (such as tariffs and non-tariff barriers in receiving countries).

If EC is economic competitiveness in a sector in a given country, K is the set of knowledge relevant to that sector held in that country, FP is the set of factor prices relevant to the sector in the country, and OC other costs in getting goods and services to market, then economic competitiveness in that country can be expressed as

EC = f(K) + f(FP) + f(OC)

Economic competitiveness will be expected to increase with increases in knowledge, decrease with increase in prices of factor inputs relative to other countries, and decrease with increase in other costs. In this essay, I will solely focus on the role of knowledge in determining a country's economic competitiveness. I will leave the discussion of the impact of factor prices and other costs for later essays. However, I will point out here that these two sets of variables are also at least partly a function of knowledge held by the different countries.

The rest of this essay is presented in four parts. First, I will discuss the 4SoK framework in detail and elaborate what each of the four quadrants contain. Second, I will divide the world into three sets of countries - least developed countries (LDCs), emerging markets, and developed countries - and present the 4SoK framework as it applies to each of these sets of countries. Third, I will discuss how this framework informs the strategies and policies that each of these three sets of countries should pursue to enhance economic competitiveness. Finally, I conclude with some thoughts on how this analysis can be taken forward further. This essay will be posted in two separate blogs - sections 1 and 2 in the first blog, and sections 3 and 4 in the second.

1. The 4SoK frameworkExhibit II shows the components in each of the four states of knowledge in the 4SoK framework. It distinguishes the knowledge we have into two types - first, knowledge of the state of the world and how it works, and second, the knowledgethat enables us to change the state of world. One could call the first science, and the second, technology. But I will avoid using these terms here as a catch all, and instead focus in more specific detail on what these two types of knowledge mean and how they are differently manifested in each of the four quadrants in the 4SoK framework.

In the known known quadrant, our knowledge about the state of the world include our observations about the present, our known record of the past, and our current understanding of how the world works. By the last, I mean our understanding of the relationships between different variables, especially our understanding of cause and effect relationships. This includes all the knowledge that we have in the different disciplines such as physics, chemistry, biology, mathematics, social science, anthropology, medicine, psychology, etc. So this category of knowledge can contain a wide variety of things from an understanding of the DNA sequence to the understanding of customer preferences for different types of toothpaste. The more we have of this knowledge, the more the opportunities are to convert this knowledge into an economic good or service.

This conversion is possible due to the second knowledge that we possess, that of how to change the state of the world. This includes both technological knowledge such as how to make a car, and business knowledge of how to get the cars one makes to millions of customers through thousands of dealers in a country. And similar to the first type of knowledge, the more we have of this knowledge, the more goods and services we can produce, as well as the more we can produce competitively. So in the case of our car example, if we have more technological knowledge, not only can we produce cars, but we can make better or cheaper cars. And the more business knowledge we have have, we can market the car to more customers more effectively.Thesecond quadrant, the unknown known, contains all the knowledge that exists in the world but of which we are unaware or to which we don't have access. For a country, this can include knowledge that exists in a country in reports, libraries, that no one is aware of, or knowledge that is held in other countries but not in the country in question. The third quadrant, the known unknown contains two types of known unknowns. The first are the future states of variables that we know about and track, such as inflation, GDP per capita, etc. The second are the known gaps in our knowledge about the state of the world as well as in our technological and business knowledge. For example, if we take the case of alternative energies, scientists, engineers and policymakers in the United States are aware of the different possible sources such as nuclear, clean coal, biofuels, solar, wind etc., and they are also aware of different technologies being pursued within each of these, but they do not know which one will be successful in the future. In many cases, the scientists and engineers also know the bottlenecks and technological hurdles they face, but have not figured out the solutions to these yet. The last quadrant the unknown unknown contains knowledge about the state of the world and how we can transform it that does not exist and that we are completely unaware of. For example, this would have been knowledge of the internet in 1950.

2. Applying the 4SoK framework to understand economic competitiveness in different sets of countries.

In this section, I will apply the 4SoK framework to understand the differences in economic competitiveness between the LDCs, emerging markets and developed countries from the perspective of knowledge held in those countries. Before we get to these three sets of countries, let us first look at the 4SoK framework as applied to the entire world as shown in Exhibit III.

The length of the lower red bar represents the set of knowledge that exists in the world. The share of the length of this red bar that is in the first quadrant represents the share of the knowledge that exists in the world that is known. As our reference in this case is the entire world, the first quadrant contains the entire length of the bar, as the entire world holds all the knowledge that exists in it. The length of the upper red bar represents the set of unknown knowledge that is known by the entire world. The length of this red bar expressed in the known unknown quadrant is the share of this global known unknown set held in the reference country or region. As in this case, the reference is the entire world, the known unknown quadrant contains 100% of the length of this bar.

Now let us turn to LDCs in Exhibit IV. As shown in the known known quadrant by the length of the red bar in that quadrant, the share of the total known in the world held in the LDC is relatively small. The rest of the red bar is in the unknown known quadrant, as this existing knowledge is mostly held outside the LDC (there may be some codified knowledge in the LDC that the LDC is not aware of in this quadrant, but the size of this is probably very small). Similarly, the share of the world's known unknowns known in the LDC would be small too, in fact this is likely to be even smaller than the known knowns.

Now let us to turn to the green bar and what it represents. This is critical to understanding the state of development in a country and the barriers it faces in increasing economic competitiveness. Just because some knowledge exists in the country - in books and documents, in other media and in the minds of citizens - does not mean that the country is acting on that knowledge to increase economic competitiveness. Let me explain what I mean with the example of women in Saudi Arabia. There are many people in Saudi Arabia who know that female participation in the labour force is key to increasing the country's economic competitiveness. However, they are not able to act on that knowledge because of other reasons such as culture and values, which define particular roles for women in the Saudi society.

In an LDC, there may be several barriers to their ability to act on the relatively little knowledge they possess - culture and values, institutions and legacy regulations that hinder enterprises taking advantage of existing knowledge, lack of resources or investment to exploit the knowledge the country has, the rule by the majority or other groups that don't possess this knowledge, or if the rulers possess the knowledge, the conflict their best interests have with the country's best interests, etc. For similar reasons, they also take relatively little action to increase knowledge transfer from other countries as shown by the relatively thin column of green in the bottom right quadrant.

As in the known known and unknown known quadrants, the green in the known unknown quadrant is a negligible share of the already little amount of the known unknowns that the LDC knows, for the same reasons discussed in the previous paragraph. In addition to that, the small amount of knowledge they have also inhibits them from acting on the unknown knowns or the known unknowns, as the approaches to tackle these also require sophisticated knowledge that may not exist in the LDC. I do not discuss the unknown unknowns here as that is even more inaccessible to the LDCs.

Therefore, there are many reasons why in an LDC, the share of knowledge they act upon to increase competitiveness is a small share of the small amount of knowledge they possess in the first place or why they do not do better at accessing more of the world's stock of knowledge. This is important to understand, especially if internal policy makers or external agencies want to intervene to help LDCs develop and build economic competitiveness. I will talk about how they can do this in the next section. Here I restrict the discussion to characterising the situation in the different sets of countries.

Now let us move to the next step in the hierarchy of development and look at emerging markets such as China, India, Brazil and Eastern Europe in Exhibit V. Here, the known known quadrant contains a larger share of the known knowledge as seen by the longer red share in this quadrant. Similarly, they also contain larger shares of the known unknowns too as seen in the top left quadrant. The greens are also relatively bigger as they are able to act on a bigger share of the known knowns to increase economic competitiveness. They also do a better job of learning from other countries, and therefore overtime increasing the share of the world's knowledge they access. The red is shifted more to the left over time.

The primary efforts at increasing competitiveness in emerging markets comes from these two actions - increasing the actioned share of knowledge they possess, and increasing the knowledge they possess by learning from other countries. There is less of creating new knowledge by converting known unknowns to known knowns and even less of drawing knowledge out of the unknown unknowns.

On the other hand, in the developed countries, as seen in Exhibit VI, the scope to increase economic competitiveness from increasing the actioned share of knowledge they possess or increasing the share of the world's knowledge they possess by learning from others is smaller than in emerging markets. In the most advanced countries, the scope to increase economic competitiveness comes from being the first or one of the first to transfer knowledge from the upper two quadrants into the bottom left quadrant. In this endeavour, they also have the advantage of having a large amount of existing knowledge that they have actioned, as the more you know, the higher your ability to capture more from the unknown. The policies and strategies they must pursue to keep ahead of the curve, therefore, are different from that of the emerging markets.

It is to those policies that I turn to in the next section, which is the most fun section of this essay. But for that, you will have to wait for the next edition of my blog, which should be available in the next few days. But in the meantime, digest this, and send me questions you have, if any.

Sunday, April 19, 2009

In my previous blog, I had described how the world, especially in its advanced cities, is evolving into a freelance society, where no one will have jobs, but where everyone will have work. As promised, in this blog, I will discuss how this will change the cities we live in, and which cities will be the new winners. While these are two separate questions, the first about what the freelance society would do to our cities, and the second about what cities should do to be competitive in this new world, I will assume for the purposes of this essay that the changes demanded and the best responses provided coincide. This assumption allows me to merge the questions into one - what will the ideal city for a freelance society be like? What would/should its defining features be and how would/should it be different from the cities of today?

I believe there are at least six defining features of the ideal city for a freelance society. As we go through these features, we will see some qualities recurring through them. Put together these qualities will capture the essence of the ideal city.

First, this ideal city will prize and foster versatility and resilience in its citizens. In the old city (including today's) where people had jobs, knowledge and skill in one area was valued. And the more the old city's citizen worked at her job, the better she got at it (or at least was deemed to do so), and the more valuable she became to her employer (current or prospective). The Master of One Trade, with knowledge of no other was the winner. The world became more specialized, and the winner's mastery narrowed. Doctors specialized in specific sub-diseases in specific body sub-parts, with the principle - the narrower the specialization, the higher the remuneration. Similar things could be said about lawyers, economists, physical scientists, businessmen, etc. Take the last example, if you look at job advertisements for head of sales and marketing in a company, they always ask for 10-15 years or more of experience. This may be sensible in a stable, slow changing world, but in a fast ever changing world, do you want someone who will repeat or imitate her past work or do you want someone who will try what has not been tried before?

In a freelance society, one does not have to choose between trades, the citizen of the new city does not have to be a marketing professional or lawyer,one could be both. In fact, she must be both or more than both. There is no one employer she has to satisfy, but many buyers of her knowledge and skills, and she could sell different trades to different buyers. And in a fast changing world, it makes sense to diversify, because if the demand for one type of trade lessenes, she would still have others to fall back on. So the winner will not be the master of one trade, but the master of a few (along with being the jack of a few others, which can be ramped up to master level given the necessity and/or the inclination).

The new citizen must be versatile and she must be resilient.

The ideal city will help its citizens attain these qualities by providing an environment for continuous education - its citizens will never leave school permanently, they will always come back for short periods of time or they will permanently devote a part of their time to learning. In the ideal city, learning will become a regular part of everyday life, just as work, household chores, exercise (for some) and vacations. This will change the city's approach to education. It will enable its citizens to enter the labour market younger, but allow them to return to school throughout their lives as and when needed.

The second defining feature of the ideal city would be a market that prizes what one can do over what one has done. It will be forward looking. In today's world, employers prize experience as that is the most accessible source of information about a person's capabilities. But is it the most reliable? Is a physicist with 30 years of experience better than one with 5? Is an air stewardess with 30 years of experience better than one with 3? Or is a marketing professional with 20 years of experience better than one with 4? In none of these cases, it is necessary that the more experienced person will be the more capable person. This is not to say that experience does not matter. It does matter and will continue to matter in the freelance society, but not in the ways we have thought about it or used it as a guide to predict future performance.

In many cases, experience will continue to matter. For example, the more operations a surgeon does, the better she becomes or the more flights that a pilot has behind her, the better she is. But there are diminishing returns to experience. At some point more experience does not matter. But in a freelance society, the returns to experience will diminish faster as knowledge disseminates more widely and rapidly. In addition, given this higher dissemination and absorption of knowledge (and therefore, the associated higher generation of knowledge), experience may become irrelevant or less relevant faster than before, and therefore the person who keeps up with the new knowledge will win - what you have done will be less important than what you can do.

Experience, while counting less will still count in two ways. One it will continue to matter in jobs requiring repetition, such as the aforementioned surgery and flying a plane, at least for a short period of time when the technology and methods are relatively the same. On the other hand, the jobs that require constant thinking and innovation, where the task at hand while similar to previous tasks is still not like any other, the sort of experience that comes from repetition will not matter. However, another type of experience will matter, and this brings us to the second area where experience will count. This is the experience of how to solve problems or do things rather than the experience of solving problems or doing things. And this experience will come from working with many different types of problems, working with many different types of people, and working in many different types of situations. This experience will teach the new citizen to deal withuncertainty, ambiguity and change.

Therefore, a city that promotes critical thinking, openness and tolerance in its citizens over faith and tribal mindedness will win. This may seem obvious and many will think we are already there, but my experience in the US and UK tells me that it is not so. In both countries, there is a great confidence among its employers and employees that they have all the answers - and the outside world does not have much to teach them. For example, if you bid for a local government contract in the UK, experience with other local governments in the UK will count far more than experience with a local government in China or Japan. There may be legitimate reasons for this, but I think that such parochialism is more widespread than it needs to be. In this sense, cities in emerging markets may be at an advantage because they are more open to outside influence and learning from others. In fact, some even go out of their way to do so.

The third defining feature of the ideal city for a freelance society is the dissolving of the distinctions and increasing overlap between the different types of physical spaces in a city. The ideal city will provide overlapping and seamless transitions between the home, office, school and the coffee shop. In the last major transition in the advanced cities, factories gave way to offices, and old factories and warehouses were indeed converted into offices. In the new city, the home or coffee shop will be the office or school, and the office could be the home and the resort could be the office . Rather than having offices in central areas and residences in the suburbs, there will be living spaces everywhere that seamlessly transition from one function to other.

How will this configuration look like? There may be very few and small offices owned by companies for some functions - central coordination, storage of equipment and data, etc. And these can be either in the centre or outskirts of the city or in the suburbs. The old office blocks will be converted into flexible living spaces, with apartments and common areas that can be used or rented for different functions - daycare, meeting rooms, videoconferencing, play areas, shopping, cafes, etc. As there will be one office to go to, there will be no need for companies to have separate offices. All work could be done at home or in temporarily rented meeting or workspaces, especially if the work requires several people being physically in the same room.

Rather than sequestering landuse by function, the new city will, therefore, become a collection of living communities or villages that contain overlapping spaces for all living functions. These living communities or villages could compete by providing different services and quality of life, and people could choose to live and work in communities that best meet their preferences, rather than having to compromise and live near one's job (or that of one's spouse). Given that people's preferences are diverse, the new city will have a diverse set of inter-connected local communities.

Which brings me to the fourth defining feature of the ideal city for a freelance society - connectivity. Connectivity - local, regional, national and global - will be one of the most important features of the new city. Connectivity will be more important than mobility. In fact, it will be critical, as the worker in the freelance society could be working for a client in any part of the world, in fact, she could be working for multiple clients in multiple parts of the world. Therefore, the new city must provide top of the line communications infrastructure that would enable rapid, seamless connectivity from any home, rather any room in the city to any part of the world. This will include voice, data and video communications. Just as each modern home has a washing machine or a fridge, each new home will have videoconferencing facitilities that realistically simulate real-time live interactions between people in different parts of the city, nation or world. There is already telepresencetechnology available today to enable participants attending a meeting from different locations to feel as if they are in the same room. In the new city, this will be extended to every home.

As far fewer people will be commuting to the same job everyday, and far more people would work at home and travel only for meetings at randomly distributed times, the infrastructure that has built for a commuter society will not be appropriate for the new city. Peak and off peak travel distinctions would go away. There may be far fewer people going in and out of the cente of cities every day, and more people traveling randomly between different local communities, and between cities in different parts of the world. As there will be no centre and no periphery, hub and spoke models of travel will be replaced by point to point travel - local, national and global. And cities which enable this the best will be the new winners.

The fifth defining feature of the ideal city for a freelance society will be openness and freedom to all and a complete break in the link between citizenship and nationality. The new city will be a global city, whose citizens come from all parts of the world. In a freelance society, work can be done for anyone by anyone anywhere. If in this society, a city wants to be competitive, it must attract the smart, diligent, creative people from all over the world. To do this it must be open, free and tolerant and it must provide the best living environment and living experience possible.

The sixth mundane yet important defining feature of the ideal city for a freelance society is convenience. As the citizen of such a city will be a global citizen and her work will come from many different locations from many different clients, the new city should make these local, national and international transactions as convenient and seamless as possible. This will have significant implications on how the city organizes the day to day lives of its citizens. For example, it must enable rapid, efficient monetary transactions including in foreign exchange. It must not put onerous restrictions on opening and maintaining bank accounts in different countries. It must come up with new methods of taxation that keep it competitive while at the same time prevent tax leakage or avoidance. It must figure out a new way of providing mortgages to people without regular jobs. And so on. There will be many ways lives will change in a freelance society. The city that provides the most convenience for this transition will be the winner in the freelance society.

As I have discussed the different defining features of the ideal city for a freelance society, we have seen some recurrent themes and qualities. These include - versatility, resilience, forward looking, knowledge of the how and what of solving problems and doing things, dealing with ambiguity, uncertainty and change, critical thinking, openness, tolerance, overlapping, seamlessness, connectivity, rapidity, freedom, convenience, efficiency. Of course, many of these are applicable to today's job-based society too, but many are not, and those that are applicable will be applied differently in the freelance society.

We are moving to a freelance society. And the city that figures this out first and brings about the changes talked above will be the new global city - the new New York or London, if it is not these two that figure this out the first!

Wednesday, April 15, 2009

The current downturn has exercised many minds and there is an almost universal acceptance that the world will not be the same as before. Finance will become staid and boring, bankers will not make huge bonuses, smart people will turn to the real economy, people will live within their means and so on. I do not know if any of this will come to pass. Much of this is a reflex to what was before, and if we are in trouble now, then what was before was bad, and as what will be after will need to be good, it will be the opposite of what was before. Perhaps.

But there is one way that the world is changing. It has been doing so for a long time, and this change may be hastened by the recession. I believe that we are moving to what I will call a Freelance Society, that is a society where everyone will have work but no one will have a job. In this essay, I will first discuss what this society is and why I believe we are moving towards it. Then, I will examine how the freelance society will change the cities, suburbs, and the countryside we live in.

Since I graduated from college 15 years ago, I have had 10 different jobs. Admittedly, some of this was part time employment during graduate school, but at least half of these jobs were in full time employment. My experience is not unique in my generation, my wife and many of my friends and acquaintances also have had multiple jobs in their short careers. In fact, some of us have also changed careers. My brother was an electronics engineer, then he became a software engineer, and how he is on his way to becoming a full-fledged economist with a doctorate. All this may seem unremarkable, but if we just look back a generation ago, we will see that there has been a big shift. My father worked for the Indian Army till he retired, and before that my grandfather worked for the state electricity board till he retired. It is quite usual, even in the developed world, for people in previous generations to have had one or at most two jobs in their careers, and rarely more than one career, if at all.

Before we get carried away and pat our backs on our versatility or worry ourselves sick about the uncertainty of our experience, we must realize that this change did not in fact begin with us. In fact, our fathers and grandfathers experienced, in some ways, even more revolutionary change - the one wrought by the industrial revolution. They did not, in most cases, do what their fathers and grandfathers did, they took up different vocations, partly because the vocations changed, and partly because they had more choice. However, before them going back for centuries, occupations remained the same across generations - farmers' sons became farmers, soldiers' sons soldiers, artisans' sons artisans, and kings' sons' princes and kings. Rather unfortunately in most cases, until recently, this story has been about fathers and sons, at least in occupations outside the home. But the point can broadly hold for grandmothers, mothers and daughters too - they were all home makers (I know this is a generalization, lots of women worked in farms in many places, and even became generals and queens in some cases).

Therefore, this change from the same profession across many generations to one profession and one employer in a lifetime to several employers and even professions in a lifetime has been underway for quite some time. And I believe that we are now entering a fourth phase of change, where the connection between employer and employee will break completely, in effect, there will be no employers or employees.

There will be no jobs. But there will be work.

Each person has time and skills. They will sell their time and skills to different companies, organizations or individuals, for short or long periods of time, part time or full time. One could be doing desktop internet research for different companies, or one could do desktop research for one company, and powerpoint production for another. Individuals will come together for short periods of time on specific tasks, and once that is accomplished they will move on, together or separately to other tasks. There may even be no physical office to go to, individuals performing a task or working on a project could work from homes or even from coffee shops. They may talk or even meet through skype or other internet or telephone based communication media. They will do everything that needs doing today in an office, but the office will not be in one location, it will be spread across a city, nation wide or even the world. And no one will be an employee but everyone will work.

I know that this is an extreme characterization, the reality will be somewhere in between. Even today, there are many workers who have lifetime employment with one employer, especially in the government and the military. And in the freelance society, there will still be some companies that work traditionally, and other companies may still need a core of "permanent" employees who manage the different workers on contracts.

In a way, this is similar to the changes taking place in the world of computing. Computing is increasingly moving away from doing the computing work on PCs and laptops to doing the work on clouds of computers. Each computing task may be performed on many different remote machines, and the next task may be performed on another set of machines, some of which may or may not be the same as the ones that did the previous task. There will be a diffuse and constantly changing link between the user (and the outputs she wants) and the computers that do the work for her. She may in effect be paying (indirectly) many different providers of computing power for the work she is getting done.

Similarly, companies and organizations (and individuals) may be able to draw upon a global pool of individuals with time and different skills in a flexible, diffuse and ever changing manner to get the work done.

Why is this change happening now? The big part of the answer is technological change. Just as the early industrial revolution broke the connection between work and ancestry, the later faster-paced technological change (and globalization) led people to have more jobs and careers, today's communications revolution is the harbinger of this move to a freelance society. In 1937, Ronald Coase set out his theory of the firm, which basically said that firms arise to internalize some functions to avoid the transactions costs of operating on a purely market based system. The communications technology revolution taking place is reducing these transactions costs and therefore eroding the raisond'etre of a firm. No wonder then that the world of firms is changing into a society of freelance workers.

This change has already started happening. Eden McCallum, a pioneering company started by McKinsey alumni delivers management consulting advice to its clients through a network of hundreds of independent consultants. There is a central core team focused on business development, administration, and provision of needed central resource support, but almost all the project work is done by teams of independent consultants drawn from Eden McCallum's network. These consultants can work part-time, full-time, for a few weeks or for months at a stretch. They can take time off with their families for months and come back later to work on a project. They also work in ever changing teams and with ever changing clients. Essentially, Eden McCallum is flexibly matching the needs of clients with the needs and skills of its independent consultants, providing satisfaction to both groups.

This is not an isolated model, many other consultants use this approach, but few have taken it as far as Eden McCallum. This move to freelance work is not restricted to the professional services sector, it may even have commenced elsewhere - plumbers, other tradespeople, bartenders, waiters, journalists, shift workers, unskilled jobsmen, etc. People work without having jobs.

This move to a freelance society is being reinforced by large companies such as AT&T in the US who are changing their workplaces in ways that might bring about the freelance model even to established companies. To cut costs in the current downturn, they are saving office costs by having people work from home. Most of the work is done on computers and on the phone, so this can be done any place with a computer and a phone. And modern technology also allows limited video conferencing. Given this, more of the employees at such large companies are being encouraged to work from home. It will not be long before these employees realize that they can do the same for more than one company or they can do different things for different companies from home or a combination of home, Starbucks and office. And firms may then tranform themselves to a shell or core and farm out most of the work to an evershifting diffuse body of individuals (or groups of individuals) spread around the world (or on cyberspace). In a way, this will be outsourcing and offshoring taken to its limit.

So how will this shift change the places we live in? And how can cities become more competitive in this new freelance society? For answers, see for my next blog.

Monday, April 13, 2009

Economists, financial experts, politicians, bureaucrats, commentators, bloggers and others around the world are grappling with the question of how to respond to the current recession, acknowledged by many to be the biggest recession since the Great Depression. One approach common to many, if not most, of their analyses is to look at the past - the Great Depression itself, the Japanese lost decade, the Swedish bank crisis, to name a few of the most prominent examples - and draw inferences about what we should or should not do today to deal with the current recession. This approach of learning from the past is not restricted to economic analysis or economic policy, rather it is used in almost all instances when we have to plan for the future. Banks use it to set current interest rates on loans, insurance companies use it to set premiums, businesses use it to develop strategy, governments use it to set policy, and at an individual or family level, we use it to make personal decisions. While learning from the past is important in our decision-making, given that all knowledge is based on past experience (and our understanding and interpretation thereof), this approach of decision-making from extrapolation poses the pitfall of planning for the past rather than for the future. It is this issue that I address in this essay (and will address in ones to follow) - How do we plan for the future instead of planning for the past? In this essay, I set out the framework I will use to address this question, and in subsequent essays, I will try to answer this question by applying this framework to specific examples.

Planning is about decision-making - setting a course of action, allocating resources, prioritization, etc. The quality or effectiveness of decision-making in any area depends on the state of knowledge relevant to the area, and how the decision-maker responds to it. First, I will discuss the different possible states of knowledge, and then I will talk about the different possible responses to these states of knowledge that impact the decisions we make and how we make them.

As shown in Exhibit 1, there are four possible states of knowledge from the point of view of a decision-maker, which could be an individual, a group or an organization. We shall call this decision-maker the agent for the purposes of this essay. The vertical axis in the exhibit represents the state of knowledge in the world in general, and it divides this into two possibilities, either something is known, or it is not. The known here refers to any knowledge that exists in people's heads, computers, books or any other source that can contain knowledge that can be recovered by the agent, given sufficient interest, resources and effort. What is unknown is something that has not been discovered yet or something that was known but has been lost and cannot be recovered (it can of course, be discovered anew).

The horizontal axis represents the state of awareness of the agent about the knowledge of the thing or area in question. Either the agent knows the state of existence of the knowledge in question or it does not. Given this, there are four possible states of knowledge from the point of view of the agent, the known knowns, the known unknowns, the unknown knowns, and the unknown unknowns made famous by former US Defense Secretary Donald Rumsfeld.

Exhibit 1: Four states of knowledge

The bottom left hand quadrant represents the known known, and an example of this would be the knowledge that the US Treasury department (at least I would hope so) has about the Swedish banking crisis, the policy response and the shape of the post-response recovery from the banking crisis. The top left hand quadrant represents the known unknown, and to take our example further, this would represent the answer to the question - would the replication of the Swedish policy response work in the current crisis in the United States? The US Treasury Department does not definitively know the answer to this question, but they do know that they don't know the answer to this question (again I would hope so).

The bottom right hand quadrant represents the unknown known - knowledge which is known by someone or is captured somewhere, but the decision-maker it not aware of this. The example of this would be the knowledge of other bank crises in history or in other countries that exist in books, papers and in the heads of people in other countries, but of which the US treasury department is unaware. I would imagine that the size of knowledge in this box in this specific example has been shrinking with all the research and analysis already done and being done in the government and outside. This then points to the appropriate decision-making response to the knowledge in this quadrant - search and research that pushes the knowledge from this quadrant to the bottom left one. I will come back to this in more detail in a future essay on the details of how we can respond appropriately to the situations presented by the four different states of knowledge.

Finally, the top right quadrant consists of the unknown, unknown. The example of this would be the US Treasury department's or the Fed's knowledge in 2006 about how the economy would look like in 2009 (not variables like GDP growth, inflation, etc., which would be known unknowns, but questions like whether there would be a major crisis, and what shape this crisis would take - although keeping in mind that if they could frame this question in 2006, this would have become a known unknown).

Given these four states of knowledge, there are four possible decision-making responses. I describe these below in increasing order of complexity and sophistication.

The first most basic response is for the agent to make decisions based on what the agent already knows or the agent's direct experience. I guess that a lot of decision-making in the world is of this variety because of reasons of time, resources, laziness, discomfort with ambiguity, fundamentalist beliefs, etc. Examples of this type of decision-making include the following:

Getting married to someone from your caste and religion because this is what has always been done in the past

The annoying persistence of British companies and organizations to contact you by post rather than the speedier email

New company executives making decisions based on their direct past experience in other companies (this may not be all bad, and if we think of the company rather than the executive as the agent, this then becomes an example of the second type of response)

Deciding to build another 8 lane highway because this is what you did before to solve traffic problems

Many religious, social and cultural practices that are based on doing things the way they have always been done

Treating theory or ideology as gospel and always following it, no matter what - a good example is the Republican solution of tax cuts to all problems (although this may require a category of its own of I don't care what I know, but I will do it this way anyways)

The second response, like the first is based on learning from past experience. But it moves a step beyond and tries to learn not just from the agent's direct experience but also from the experiences of others. This essentially tries to increase the known known quadrant by reducing the unknown knowns. The tools used to do this are case studies, precedent studies, benchmarking, surveys, focus groups, etc. This form of decision-making is used by most of the smarter people and organizations, and it can often give a big leap in benefit over the previous response. Examples of this include the East Asians copying western technologies and then beating the west by using cheaper labour to produce the same tradeable goods and services. Or companies copying successful strategies from other companies, such as the copying of the Japanese just in time inventory strategy by US companies, the entry by US and European car companies into the hybrid car market space after the Japanese did so, and so on. There are big benefits to be had here, especially if the agent is the first or second follower. And it is an easier path to progress as you can build better products, services, institutions, practices, etc. based on what someone else has already done before. Or what someone else knows, as in the example given above of hiring executives from other companies to take advantage of their knowledge gained in other companies.

The third decision-making response deals with the known unknowns and it does it in two ways. First, it tries to move the knowledge from this box to the one below through focused research and analysis. Second, it tries to assess probabilities and consequences of different outcomes (scenario analysis, simulation, etc.) and prepares contingency plans for these. Let us understand this with the example of a marketing executive trying to predict the size of market for cars in the next two years. She can do this using the first decision-making method and extrapolate the past few years trend forward. Or she can incorporate the second method and look at what happened in other markets - geographies, products, times, etc. and prepare a more sophisticated analysis based on more variables (this may not necessarily be better, but more on this in subsequent essays). Or she can identify the variables that would affect the demand for cars, assign probability distributions around these and simulate the probabilities of potential market demand sizes. Based on these probabilities, she can work with other company executives to develop a business strategy with the necessary contingencies built in. This last would be an example of the third decision-making response. (Again, whether this is the right response is not automatically evident, and I will discuss this point in subsequent essays).

The last response addresses the unknown unknown quadrant. This is the most difficult response as the agent does not know what to plan for. Therefore, rather than planning for any specific outcome, the agent must focus on building the ability to innovate, to flexibly respond to uncertain scenarios, and a resilience that allows the agent to take hits and still survive and come back. Two examples of long term success based on innovation, flexibility and resilience are GE and IBM.

I conclude this essay here. In the next one, I will show how we can use this framework to better plan for the future by taking the specific example of how the United States should approach building competitiveness in the long run. This is especially pertinent today, as the United States is fundamentally rethinking the role of the government, it needs to adopt an approach that plans for the future instead of planning for the past.